CAPITAL gains tax, next to income tax, can have the biggest impact over a person's life. This can happen when investments are sold, or as a result of assets received as an inheritance or a gift.
Q My sister and I inherited mineral rights left to us by my mother, who received them when my father died about 1978. I accepted an offer from a buyer this year on my portion of the minerals. They sent me a cheque, and my sister kept the mineral rights to receive a share of future royalties. How much capital gains would I pay on the proceeds from those minerals?
A Assets inherited are treated differently for capital gains tax purposes, depending on when the original owner acquired them. For assets purchased by the deceased after September 20, 1985, will be treated as being purchased by the person who inherits the asset at the same cost originally paid by the deceased.
Assets purchased before September 20, 1985, will be regarded as being purchased by the person who inherits them at their market value at the date of death of the deceased. As your mother inherited the mineral rights in 1978, the value for capital gains tax purposes for your sale will be the market value at your mother's death.
Once you've established the value of your share of the mineral rights you will pay capital gains tax on the difference between the sale proceeds you received and that cost. If you held the mineral rights for longer than 12 months you will pay tax on 50 per cent of the gain made. This assessable gain will be added to your other income in that year, taxed at the applicable marginal rate.
Q When a child inherits a property and wishes to keep it, understanding that if the property was sold then CGT is payable, does he or she pay any tax simply at the inheritance stage?
A There is no tax payable by anyone at the time they inherit an asset. Where assets held in the estate of a deceased are sold, and then cash is distributed to the beneficiaries instead of property, tax can be payable by the estate.
If the property was the deceased's home, it can be kept for up to two years and sold without capital gains tax payable. If the property is held for longer than two years and then sold, capital gains could be payable unless the new owner occupied it as their home.
Q I am receiving a transfer of property from my uncle to me as a gift with no consideration. What taxes am I subjected to?
A There are no gift duties or taxes for the receiver. Your uncle could be subject to capital gains tax depending on when he bought the property. If it was before September 20, 1985, no tax will be payable.
For income tax purposes a valuation should be obtained at the date of the transfer. This can be used to calculate tax payable on any capital gain made by your uncle. It would also be the basis for calculating future capital gain made by you. The value will be counted as an asset by Centrelink purposes for your uncle for five years.
Questions can be emailed to super@taxbiz.com.au. Max Newnham's book, Funding your Retirement, is available in shops and as an e-book.
Frequently Asked Questions about this Article…
What is capital gains tax (CGT) on inherited assets in Australia?
Capital gains tax can apply when you sell inherited assets. How CGT is calculated depends on when the original owner acquired the asset. Assets purchased by the deceased after 20 September 1985 carry over the deceased's cost base, while assets purchased before that date are treated at their market value at the date of death.
How is the cost base worked out for inherited mineral rights or other assets?
If the deceased bought the asset before 20 September 1985, the beneficiary's cost base is the asset's market value at the date of the deceased's death. If the deceased bought it after that date, the beneficiary inherits the deceased's original cost base.
If I sell my share of inherited mineral rights, how much CGT will I pay?
You pay CGT on the difference between your sale proceeds and your cost base (market value at the date of death for pre-1985 assets). If you held the inherited rights for more than 12 months, only 50% of the capital gain is assessable; that assessable gain is added to your other taxable income and taxed at your marginal rate.
Do I have to pay tax at the moment I inherit property or mineral rights?
No. There is no tax payable simply because you inherit an asset. CGT may become payable only if and when the asset is sold. However, if assets in the estate are sold and cash distributed instead of transferring property, the estate itself may be liable for tax.
What special CGT rules apply if the inherited asset was the deceased's home?
The deceased's home can generally be kept for up to two years and then sold without CGT being payable. If the property is held for longer than two years and then sold, CGT may apply unless the new owner occupies it as their main residence.
If a relative gifts me a property with no payment, am I taxed on the gift?
There are no gift duties or taxes for the recipient. The donor, however, may be liable for CGT depending on when they originally acquired the property. A valuation at the date of transfer should be obtained to calculate any CGT the donor owes and to set the basis for any future CGT you might face.
Why should I get a valuation when receiving a gifted or inherited property?
A valuation at the date of transfer is used for income tax purposes: it helps calculate any capital gain the donor may need to declare and becomes your cost base for calculating any future capital gain when you sell the asset.
Will a transferred property affect Centrelink assets or obligations?
Yes. The article notes that the value of a transferred asset can be counted as an asset for Centrelink purposes for the donor for five years, so transfers may have Centrelink consequences that should be considered.
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